Made in Mexico: Manufacturing is becoming more focused on high-value production

Since the early days of NAFTA, the Mexican manufacturing sector has evolved extensively. While the country once positioned itself as a destination for basic cross-border assembly operations for electronics and textiles, it is now developing a highly specialised manufacturing market. In the fourth quarter of 2014, manufacturing represented 17.5% of GDP, according to the National Institute of Statistics and Geography, indicating 3.4% growth in the first three quarters of 2014.

Automotive

According to Guillermo Prieto, executive chairman of the Mexican Association of Automobile Dealers, the automotive industry represents around 4% of Mexico’s GDP and 23% of the manufacturing industry. Prieto told OBG that the industry employs around 1m workers directly and 700,000 indirectly. The number of brands with sales presence in the country has grown substantially from five before 1994 to more than 19 in 2015. Of these, nine – Volkswagen, Ford, Nissan, Honda, Toyota, GM, FCA Group and Mazda – have production facilities in the country. New plants have also been opened from Kia, BMW and Audi, in addition to a joint venture (JV) from Infiniti and Mercedes Benz.

In 2014, 3.36m units were produced, over 80% of which were exported. The main export markets are the NAFTA region (82% of exports, of which 71% is represented by the US), Canada, Brazil and Europe. Indeed, more than 1.87m Mexican-made automobiles went to the US in 2014, accounting for around 12% of new car sales in the northern neighbour’s market. Pedro Tabera, the managing director of Mercedes Benz Mexico, told OBG that automobile prices will remain stable in Mexico for a variety of reasons. “With regard to national production, prices have remained stable, mostly due to the high level of competition in the sector,” he said.

New Investments

According to Fausto Cuevas Mesa, the managing director of the Mexican Automotive Industry Association (Asociación Mexicana de la Industria Automotriz, AMIA), there are multiple new investments under way. “The forecast points to production reaching 5m vehicles by 2020,” Cuevas Mesa told OBG. “Upcoming investments include plants for Audi in Puebla; BMW in San Luis Potosí; Mazda and Honda, which started operations in Guanajuato in 2014; a JV between Infinity and Mercedes Benz in Aguascalientes; and KIA in Nuevo León.” GM, Ford and Volkswagen are planning expansions and investments in vehicles, motors and transmissions manufacturing facilities.

Financing

Another identified challenge for local automotive sales is financing. AMIA reported new car finance penetration rates have risen from around 50% in the first quarter of 2014 to 60% in the first quarter of 2015. Nonetheless, these numbers are low compared to the 70-75% in countries like Brazil and the 90-95% in the US. Cuevas Mesa explained that figures from a domestic market analysis indicate that the Mexican internal car market could reach 2m units per year, up significantly from the current 1.3m units per year. This could be achieved if 80-85% financing rates can be reached like in other Latin American countries. “We have looked at programmes in conjunction with the Ministry of Economy and Nacional Financiera,” Cuevas Mesa said. “However, the main problem is related to legal framework, since redeeming the collateral can take six months to a year.” He added that, although the tax reform modified the commerce code – thereby allowing for shorter redemption times – these periods make financing expensive or unviable. “In 2015 we are expecting the automotive industry to grow at a rate of around 10%, which we believe will also lead to an increase in the number of financing awarded for automobile purchase,” Andres de la Parra, managing director of Nissan Renault Finance México, told OBG. “We also see an opportunity in offering financing for the purchase of used cars, a sector which is not very developed.”

Aerospace

Another success story within the high-end manufacturing realm has been the aerospace industry. Once a small cluster, the industry boasts 300 companies, ranks 14th worldwide in the aviation industry and is the sixth-largest supplier to the US, growth that is largely due to NAFTA. The sector employs 45,000 people, mostly performing highly specialised jobs, and is growing. In the 2013-14 period, exports grew 18%, surpassing the 16.6% average annual growth since 2009. Aerospace exports in 2013 totalled $5.4bn, while imports were worth $4.4bn. Four states hold the largest clusters, with Baja California the leader, hosting 80 players, followed by Sonora and Querétaro, with the latter boasting the largest number of research & development facilities in the country. The industry aims at further growth. Vladimiro de la Mora, president of the Mexican Federation of Aerospace Industries (FEMIA), said in a publication by Mexican trade promoter ProMé xico in July 2014 that forecasts indicate 52,000 jobs will be created by the end of 2015, with exports exceeding the $7.5bn mark. He also added that the amount of local content in aircrafts is expected to grow to over 30% in the same period. In the longer term, de la Mora said industry objectives include reaching $11bn in exports by 2020, and raising the job opportunities to 100,000 and national content to over 40%. Finally, he explained that Mexico is ranked in the top 20 list of global suppliers to the industry; sector objectives include being part of the top 10 by the end of the decade. One of the challenges identified by aerospace clusters is supply chain integration. While the automotive industry is used to operating under the just-in-time manufacturing and inventory scheme, this has proven challenging for aerospace. One of the reasons has to do with production scale. Efforts being taken to improve the process include the signing of a Business-Aerospace Aerocluster Agreement between the French ChampagneArdenne and Baja California Aerospace Clusters in 2015, aimed at cross-cluster learning and integration.

Workforce

A well-prepared labour force is imperative to successful industrial development, and Mexico has undertaken many initiatives in order to train the human capital required. “The state of Queretaro is one of Mexico’s regions that is focusing on increasing the number of graduates in engineering,” Galo Barrios, the managing director at Especialistas en Turbopartes (ETU), explained to OBG. “This high number of engineers and the state’s advantageous location make it an ideal location for the export sector, which is host to the automotive and aerospace industries.” Nonetheless, the growth rates for high-end manufacturing industries have put pressure on the educational systems to qualify more and more personnel. As Cuevas Mesa explained, the amount of qualified labour and engineers is definitely a challenge to the academic institutions.

According to Jorge Contreras, president of professional training provider Grupo CEDVA, “The country, educators and manufacturing companies are collaborating more and more closely. For example, the automotive industry has made technology available to educational institutions which helps enhance the level of academic training, and raise the skill sets of graduates.”

Mexico has become an industrial world player by focusing on growth-oriented export industries. Still, challenges remain. The legal framework can be a barrier to finance and Customs, while infrastructure will require large investments and education needs a boost.